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A Fin24 user is questioning whether it was right to deduct R14 570 in taxes from a R82 743 provident fund.

He writes: "During Tax Year February 2015 my wife received an amount of R82 743.00 representing a surplus on valuation on her provident fund. From this R14 570.00 was deducted for tax. Alexander Forbes issued a Tax Certificate reflecting the deduction but referred to Tax Y/E 2006.

Her tax for Y/E 2015 was nil, but SARS would not recognise the deduction. Their response was as follows:

'NOTES: 2006 Year of Assessment: As the amount accrued to you during the 2006 tax assessment the lump sum from Alexander Forbes will be included in the 2006 year of assessment. Please keep in mind this will not create a credit amount to you but an amount payable by you on the above amount.'

We don’t have enough information to provide guidance here and you may be well advised to consult a tax specialist. It is possible that the following applies in your case.

The provisions of section 15B of the Pension Funds Act 24 of 1956 regulate the distribution of surplus apportionments to pensioners, former members and current members of retirement funds under a scheme approved by the Financial Services Board.

In terms of this scheme, active members may receive their apportionment in the form of a credit to their member accounts while former members and pensioners may receive the apportionment in the form of a lump sum.

From a normal tax point of view these distributions are excluded from gross income. More formally stated, any lump-sum benefit or part received by or accrued to a person subsequent to his or her retirement or withdrawal or resignation from any pension, pension preservation, provident, provident preservation or retirement annuity fund or the winding up of such a fund, will not constitute gross income (paragraph 2C of the Second Schedule to the Income Tax Act).

The Pension Funds Act 24 of 1956, by virtue of section 15E(1)(f) or (g), provides for payment to the employer of any balance in an employer surplus account on liquidation of the fund or in order to avoid retrenchment of a significant portion of the workforce.

Where during any year of assessment any actuarial surplus is so paid, the employer will be deemed to have recovered or recouped an amount equal to the actuarial surplus less any expenditure incurred by him in respect of the surplus that was not allowed as a deduction during any year of assessment (section 8(4)(b) of the Income Tax Act).

From the facts it is clear that the lump sum was subject to the withholding of employees’ tax. The fund (employer) therefore didn’t regard the lump sum as qualifying for the exclusion mentioned above and included it, or a part thereof, in gross income.

From the documents it is clear that you didn’t ask for reasons for the assessment. We are not sure if the SARS response copied in your request was taken from SARS’s response to the objection made by you. We assume it is not a ground for the assessment as you lodge an objection. SARS’s view (that it accrued in 2006) is supported by the IRP5 (issued in 2015, but in respect of the 2006 year of assessment).

Your grounds for objection doesn’t deal with the issue. In other words it doesn’t provide a reason why it should be excluded from gross income or why the date of accrual is also in the 2015 year of assessment.

If the SARS response is in fact a decision on the objection (we call it a rule 9 response) the taxpayer will have to lodge an appeal and will be able to add new grounds for the assessment. This is important because you want to lodge a complaint with the Tax Ombud.

The Tax Ombud may well, if it is a rule 9 response and the period hasn’t run out, be that the available complaints resolutions mechanisms were not exhausted.

* Have a question? Send it to us and we will find an expert to answer.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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